The biggest change to hit public pension benefits in years is sweeping across the Sacramento region, effectively cutting tens of millions of dollars from municipal worker paychecks.

The message from many local governments to their employees is simple: We'll pay our share of pension costs. You pay yours.

But that line is steeped in controversy, mired in promises made to employees years ago in lieu of pay raises and coming alongside threats of layoffs and further pension reforms.

Each year, local governments in the four-county Sacramento region are required to pay into employee pension plans. This year, those payments will total about $510 million.

Under state law, employees in theory also must pay toward their pensions, usually about 7 percent to 10 percent of their paychecks. In practice, local governments often pay all or part of their employees' share, which is allowed by state law.

In 2010, local governments paid $95 million on behalf of Sacramento-area workers, roughly equal to the entire municipal payroll of Roseville, according to the latest data from the state controller's office. The city of Sacramento paid about $17 million to "pick up" employee pension costs in 2010, higher than the $15.7 million budget deficit facing the city today.

Most of the payments began a decade ago, during better economic days, as double-digit investment gains swelled pension accounts. The perk came as cities enhanced pension benefits to allow many workers to retire sooner with more money.

"It was reflective of a time when revenues were robust and costs weren't what they are today," said Sacramento County Supervisor Phil Serna.

The extra payments largely benefit public safety workers. Regionwide, local governments cumulatively contributed the equivalent of 6 percent of payroll for safety workers' pensions in 2010, nearly double the 3.2 percent for all other workers.

Today, with the economy and investment losses pushing pension costs higher, the perk is under attack.

Local governments are increasingly issuing a warning to employees: Start paying some or all of your pension contributions or we'll lay off a bunch of your co-workers.

"It's a different world today," Serna said. "Unfortunately, we're all feeling it."

For the most part, public employee unions are giving in.

The Sacramento Metropolitan Fire District's 500-plus safety employees began paying 6 percent of their salaries to CalPERS in April 2011. That went to 9 percent in July 2011 and will jump to 12 percent next month.

Police in Woodland began paying their 9 percent share in February – and received a corresponding 9 percent wage increase. In Elk Grove, all workers will pay their share of pension costs by July, though they will get offsetting salary hikes of 5 percent or 6 percent. The exception – rank-and-file police – have tentatively agreed to follow suit.

Encouraged by the trend and compelled by a tight budget, the city of Sacramento is warning its fire and police workers that unless they pay their full share of pension contributions, 62 firefighters and 34 police officers may lose their jobs.

And leaders in Roseville, Lincoln, Yolo County, Folsom and Rancho Cordova have either finalized plans or are pushing workers to pay more toward their pensions.

"The point is, the industry is moving toward employees picking up their full cost," said Rancho Cordova City Manager Ted Gaebler.

Boom raised expectations

How did local governments get into this position?

The short answer: A bullish stock market during the dot-com boom fostered an illusion that better times could endure, as the state's retirement system consistently posted annual gains.

By mid-2000, 620 municipal pension plans in California were so flush that, from an actuarial standpoint, they had more assets than needed for projected payouts. For these "superfunded" plans, CalPERS set employer contribution rates to zero.

Labor groups soon wanted to join in.

"Employee groups came to negotiations and said, 'Look, the whole system was designed to split contributions with the employer,' " recalled Patrick Blacklock, now Yolo County administrator. " 'You no longer have to put any money in. Can we share in that benefit?' "

Local governments went along, many using money from general funds made robust by rising property and sales tax revenues. The bonus sometimes represented a politically feasible alternative to a pay raise that didn't increase the cost of benefits tied to salaries.

Public safety workers tended to benefit the most. They successfully argued that the danger inherent in their jobs justified higher pay and benefits.

"Those deputies are out there pushing those patrol cars around and showing up on your doorstep when you call 911," then-Undersheriff John McGinness said in 2003, supporting an arbitrator's ruling that Sacramento County needed to raise the share of employee pension costs it paid on behalf of deputies. Deputies later dropped the issue after getting pay raises.

Worsening investment returns largely ended such discussions.

CalPERS began issuing warnings about a decade ago that the sluggish economy and lower stock prices would cause public agency contribution rates to rise. Member agencies fell out of "superfunded" status. Only about a dozen remain statewide.

In the fiscal year that ended June 30, 2009, CalPERS recorded a crushing 24 percent investment loss. Investment returns have improved since then but remain shaky. Local governments are paying millions to play catch-up.

Cuts slam worker morale

Many public employee unions have proved willing to consider higher pension contributions, though they often seek other concessions to soften the blow.

"2013 is not 2004, we get that," Brian Rice, president of Sacramento Area Fire Fighters Local 522, said last month as the Sacramento City Council agreed to pursue pension changes. "If anybody thinks that (increased pension contributions) are not on the table, they are not living in reality."

Still, the cuts take income from public workers, often following years of layoffs, and have contributed to low morale felt throughout the public sector.

"We've got the whole public sector wrapped in this headlock so they can't breathe," said Bill Camp, executive secretary of the Sacramento Central Labor Council.

Camp said a state with a $2 trillion gross domestic product can afford to give public workers a good pension.

"My point is that's a political decision, not an economic decision, to starve government," he said.

City managers reply that there's not much else they can do to reduce short-term pension bills.

Legal experts generally agree that it would be difficult for cities to change promised pension formulas for current and retired employees. Changing those formulas for future hires, as some cities have done, won't save much money for 10 to 15 years.

If city managers get their way, pension costs will continue to increase for local workers.

"We're in a tough financial condition for awhile," said Dwight Stenbakken, deputy executive director for the League of California Cities.

The league is encouraging members to push their employees to pick up some of cities' required contributions.

In other words, the message from city managers will likely soon shift to: You pay your share, and then you pay part of our share, too.

"I don't know any other way to deal with the problem except by increasing employee (pension) contributions," Stenbakken said.

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